Money Factor

Definition

The money factor is the financing cost of monthly lease payments, essentially the portion of each monthly payment allocated to the cost of lease financing, similar to the interest in mortgage payments. The money factor is typically not quoted as an annual percentage rate (APR). To convert the quoted money factor to an APR, it must be multiplied by 2,400.

Origin

The concept of the money factor originated in the leasing industry, particularly in car and equipment leasing. As the leasing market developed, the money factor became an important tool for measuring lease costs, helping both parties better understand and compare the costs of lease agreements.

Categories and Features

The money factor is primarily used in lease contracts, especially for cars and equipment. Its features include simplicity and ease of use, allowing for quick calculation of lease financing costs. The money factor is not directly expressed as an APR, which provides flexibility in comparing different lease agreements.

Case Studies

Case Study 1: A car leasing company offers a lease agreement with a money factor of 0.0025. By multiplying it by 2,400, the APR is calculated to be 6%. This helps customers better understand the lease cost. Case Study 2: An equipment leasing company uses a money factor of 0.0030, converting to an APR of 7.2%, enabling customers to compare different leasing options.

Common Issues

Common issues include how to convert the money factor to an APR and why the money factor is not directly expressed as an APR. The money factor can be converted to an APR by multiplying it by 2,400. The money factor is not directly expressed as an APR to provide greater flexibility in comparing different lease agreements.